Larry's VC View is the bi-weekly blog by photonics entrepreneur and budding venture capitalist Dr. Larry Marshall who shares his thoughts and reflections on the VC scene, as he makes the transition from serial entrepreneur and engineer, to Venture Capitalist. He hopes to share his experiences, lessons and mistakes with fellow entrepreneurs seeking venture funding.

Monday, February 25, 2008

This is a tough one--many VCs say that their entrepreneurs get wrapped around the axle on being the CEO (king). An old friend who ran HP labs for 20 years once told me that when people come to the Valley from elsewhere, they focus on three things--title, salary, and equity, and in that order; when in fact they should be in the reverse order with title a very very distant third. At HP the authority of knowledge overrode everything else.

After a few years in the Valley, most engineers recognize the futility of title, the lack of economic benefit in 50% money (i.e., the government takes half what you earn); but many reap the rewards of stock and options that build real wealth over time and attract lovely tax treatment (AMT not withstanding!). Now sure, many others held worthless options, but before the 2000 era, companies that built real value and solid quarter-to-quarter revenue growth went public and made real wealth. Post 2000, Google turned every rental tenant I had in Mountain View into a buyer wanting to do all cash deals (one actually offered Google stock … don’t ask!).

So if you are too focused on being the boss, you are focused on wining the wrong battle--it’s a very rare CEO who can invent, found, run through pre-revenue development, cross the chasm to growth phase, get the company public, and run it as a public entity. Interestingly those rare few who can evolve with the company’s growth usually do a stellar job but it’s a high risk proposition for investors. You must be focused on building value in any way you can--if you can recruit a start CEO who is better than you, then you need to be first in line to bring them on board; don’t wait for your board of directors to tell you.

So what’s my take on this debate? I think startup CEOs and founders should want to change the world (even just a little)--they should not be motivated simply to get rich. Greed alone is never enough to sustain you through the really hard times. The best founders are often people who tried to get their employer to pursue a new strategy or product but could not get buy-in from management; frustrated and wanting to serve more customers better, they leave and do it themselves.

Also, if you just want to be rich, you are temped to sell too early--think about the founder/CEO after first-round financing who might still own 30% of his company--a $30M offer to buy before substantial revenue is a life changing event for the founder vs. the risk of raising a B round to generate real revenue and build sustaining value (this is a real example that is happening as I write). Now the founder I’m talking about is a deeply dedicated entrepreneur driven to change something in the security market that has driven him crazy for years. He has quietly gone around getting design wins and a solid B round will launch him quickly into substantial revenue.

Consider the agonizing decision. $10M in his pocket is enough to change his life (more on this later). It’s not enough to change his employees’ lives, and this is a solid close-knit team that has fought long and hard to build a strong business. The dilemma for this founder is what he would do next. He has no interest in working for a big corporation--he’d probably start another company instead—but doing what? Probably what this firm does.

So after spending a while with the acquirer he turned the acquisition offer into a partnership and stove off a potential competitor (make vs. buy decisions are tricky to manage). He’s in the process of raising a B-round now, which I’m sure will be easy to do, and with that he should be able to build a $300M+ company, of which he’ll probably still own close to 20% and turn the $10M exit now into a $50M+ exit. But … maybe he’s another Phil Merrick and capable of driving this business all the way through an IPO … putting more than $100M in his pocket and making his investors and employees very happy.

I have never sold anything and not regretted selling it in hindsight (especially real estate), including IPOs that were perhaps a little too early. If you love working with customers and creating products that serve their needs better than what’s out there today, then you will change the world (even just a little)--what better driver could you have to be an entrepreneur?